Why automobile giants are shying away from Tamil Nadu market

The latest ease-of-business rating by DIPP ranks the state at 18th, down from 12th last year. And the last time TN attracted Big Auto dollars was when Michelin and Daimler collectively pumped over Rs 7000 crore into the state.Nandini Sen Gupta | TNN | November 09, 2016, 14:58 IST

It was once heralded as the Detroit of the south. With big ticket automobile investments flowing into the Oragadam-Irrungattukottai-Maraimalainagar belt and the state’s much-vaunted ‘quality labour force’, Tamil Nadu had a natural advantage over arch rivals like Haryana and even Maharashtra. Not any more.

The latest ease-of-business rating by DIPP ranks the state at 18th, down from 12th last year. And the last time TN attracted Big Auto dollars was when Michelin and Daimler collectively pumped over Rs 7000 crore into the state.

That was five years ago. Since then, there have been incremental investments - like Royal Enfield’s third plant and R&D centre — but nothing to beat its own benchmarks. Meanwhile neighbouring Telangana and Andhra Pradesh have spruced up their act enough to lure investments away from Tamil Nadu. Is the Detroit of the south losing its horsepower?

Officials from both multinational and home-grown automotive companies feel the state is simply frittering away its advantage. "There is complete opacity in transactions and no one knows how things are done," says an auto MD with large operations in the Oragadam belt. Others echo the sentiment.

With decision-making overly centralised, TN has frittered away its efficiency and quick-decision-making advantage. Says another MD of a large auto MNC with operations in the Oragadam belt: "Big policy decisions are taken quickly but the challenge is the too-centralised structure. Unless the CM clears it, things don’t move. And often, afterwards, the operational decisions get stuck."

This despite the fact that TN still has the best engineering skills in the country and the work force is much better quality than, say, Uttarakhand. "Maharashtra, for example, is quite expensive but there are no decision-making bottlenecks there," said the MNC’s MD. "Tamil Nadu’s rise was on account of four factors – land, labour, infrastructure and a supportive government. Now that advantage is mostly eroded."

Officials from both multinational and home-grown automotive companies feel the state is simply frittering away its advantage. There is complete opacity in transactions and no one knows how things are done.

Rise of aggressive new competition is a major reason for the erosion. "States like Telangana, Andhra Pradesh and Uttarakhand have become very pro-active and are luring away potential investors. Also TN’s power problems have not helped matters. The port infrastructure is choking. The state’s advantage in terms of better infrastructure, quick decision-making has also disappeared," said Abdul Majeed, partner, PwC.

And its most important advantage — quality labour — is also fast turning into a myth. Reason: two decades of welfare state. "Walk into any automotive factory and you see imported labour," said the auto MD with operations in Oragadam.

"TN’s welfare history has created a shortage of labour and a work culture that’s a far cry from what things used to be in the mid-90s when Big Auto set up operations in the state." Currently in many of the Tier 1 and Tier 2 auto component plants, 75% of the contract labour is from Bihar and Jharkhand, said an HR industry source. "Many auto component companies are automating more than other states because of labour shortage," said the auto MD.

A highly industrialised state, TN has received $17 billion in FDI from April 2000 to March 2015 and contributes more than 10% of the national output in paper, machinery, electronics, textiles, auto and auto components, etc. But inefficiency and corruption have been eating away at its competitive advantage.

In an NCAER survey released this year Uttarakhand (32.5%) ranked as the least corrupt state and TN as the most corrupt. Given that corruption tops industry’s concerns (79.2%) among 22 parameters (followed by getting approval before starting business and getting environment clearance), TN’s ranking is serious indeed.

Said another senior auto industry official who helped set up one of the biggest automobile factories in the Oragadam belt in the 90s: "While top officials and the government have generally been supportive, TN is blighted by inefficiency and corruption lower down the line. If there was enough support for Gummidipoondi, Sri City in Andhra Pradesh would not be as successful as it is."

Denying any slowdown in investments, TN industries department officials said the latest reports of industrial investments rated the state as one of the top three destinations in the country. "The state successfully managed to get an investment commitment of Rs 2.4 lakh crore at the Global investors’ meet of 2015. At least 64 projects worth Rs 87,000 crore have taken off," said a senior government official.

The state slipped to 18th rank in the state-wise ‘ease of doing business’ as it failed to submit the requisite compliance reports to the ministry in time, due to assembly elections at that time, he said. At least six new industrial nodes would be developed with the Centre deciding to expand the Vizag-Chennai corridor further down up till Kanyakumari. "Big industrial groups are actively engaged in setting up units on the Madurai-Tuticorin corridor and in Cuddalore, Ramanathapuram and Hosur," he added.